Market hemorrhaged by massive profit taking

By Lance Mambondiani

OVERVIEW

THE Zimbabwean economy is perhaps a classic case of economic endurance against impossible odds. Very few fundamentals make any sense. Monetary policies have been stretched to the limit and far beyond the comprehension of anyone outside the country’s borders.

How, this small country, the last on the world’ s alphabet of countries, has kept afloat within such a calamitous economic minefield will require a doctoral thesis to comprehend. With Z$1 billion worth approximately GBP100, it is perhaps easy to rationalise the flight of thousands of skilled labour into neighbouring countries as economic refugees. At current fuel prices, Z$1 billion dollars buys two full tanks of gas.

The recent cash crisis highlights the shortcomings of the current economic and monetary policies and the resurgent dominance of an informal market resulting from command control and highly regulated policies stretched beyond realism.

With approximately 82 percent of the population reportedly unemployed, statistics suggest that Zimbabwe has the largest informal sector in Africa since the year 2000. A previous empirical study established that that the informal sector in Zimbabwe was 59.4 percent to the GDP, by far the largest in Africa followed by Tanzania at 58.3 percent and 57.9 percent for Nigeria. The expansion of the informal sector in Zimbabwe appears to be ‘supply driven’ with a lot of people engaging in the informal sector as a survival activity for them to earn a living due to the deteriorating macroeconomic conditions.

Indications are that a significant portion of the country’s skilled labour left their jobs to trade commodities on the thriving ‘black/parallel/ informal market’. It is quite possible that with approximately 60 percent of the population having turned into traders, the inflated prices on the parallel market is due to 3 or more layers of middle men, with the same commodities being sold more than enough times until it gets to the consumer.

Unfortunately for the government, there is no amount of police crackdown, without a matching increase in supply, likely to stop a culture seemingly embedded in a people legitimately loyal to their stomachs. Even when the economy improves, it will be extremely difficult for informal traders to abandon street hustling and consider the option of a salaried job.

Despite the government’s denial of the influence of the black market in pricing, indications are that a significant amount of business is consummated in the informal markets. Whilst the influence of ‘Roadport traders’ on the currency markets is undeniably obvious, it seems increasingly possible to assume that the psychology of the average stock market investor in Zimbabwe reflects that of a black market trader.

Except for a few counters, the stock market is increasingly under pressure from traders seeking short-term gains with little regard for trading on value or based on sound portfolio selection methods. There is no doubt, that since the Bull Run started, the stock market has produced as many cash barons (somewhat more legitimate) than the good folks at Roadport, the only difference being that there are no police cars chasing you or asking for a bribe on the stock exchange.

STOCK MARKET UPDATE

With the currency markets cooling off due to a cocktail of factors analyzed later in this report. The Bull Run on the ZSE also came to a screeching halt loosing ground in a week of negative trading as sellers dominated the market. The ZSE opened the week with losses across most counters due to profit taking across most counters.

On Monday, the industrial index shed 0.30 percent to end the day at 2,459,817,050.90 points with losses recorded in Cottco, Natfoods, CFI, Caps and Zimsun. The mining index recovered 10.08 percent to 2,198,817,050.90 points, due to gains in Bindura. The losses were repeated on Tuesday with 24 counters trading in the red and the industrial index shedding off 7.01 percent to end the day at 2,287,301,786.69 points.

The diversified conglomerate, Kingdom Meikles Africa Limited (KMAL) listed on the ZSE on Monday 14 January with the share price adjusting up 33,3 percent to Z$20 million per share led losses across several counters in a day in which Pioneer, DZHL, Natfoods and HIPPO were all in the red. The resource index retreated 1.32 percent to 2,168.988,714.11 points due to losses in Bindura and Hwange. With no change in fundamentals or policy, the general losses on the market, is a cyclical cashing in blip and not a sufficient reason to suggest that the stock market is ready to slow down. The recent gains in a protracted Bull Run season have resulted in widespread profit taking as investors decided to cash in on the extraordinary gains since the beginning of the year.

The bulls had certainly run so hard that prices got ahead of themselves. Despite the recent cooling off, more than 14 counters have already recorded a YTD more than 100 percent since the 1st of January 2008. Counters such as Celsys are up 240 percent, Chemco 200 percent, Zimsun 265 percent and StarAfrica 212.5 percent.

The average yield of the market is approximately 98.9 percent indicating that most investors have doubled their money since the beginning of the year with currency rates stagnating within the Z$7-8 million to the GBP range. More profit is collectively made on the stock exchange than in any other productive sector in the country. Any investor who records a cumulative return on investment of more than 200 percent within a 7-day trading period would be brave not to grab a sell off opportunity.

Where do we see Opportunities?

Profit taking within a steaming bull run often provides a golden opportunity for investors to restructure their portfolios with fresh picks trading at undercut prices. A number of counters with strong earnings capacity such as such as DZHL, KMAL, and Bindura will shortly be on the rebound as the market seeks an inevitable correction. If the market retreat has been based on profit taking ‘herd behaviour’ it is possible that the correction will occur imminently. We put our money on a significant adjustment on KMAL, down to Z$15,000,000.00 after touching Z$20,000,000.00 on Monday. NMB, which shed off 17.65 percent and trading at a Price Earnings (p/e) ratio of 2,592.6 is always a good buy.

Investors should also consider that Zimpapers which seems to be at the bottom of any portfolio manager’s picks. Our assessment is that Zimpaper’s Q1 earnings capacity looks good. The forthcoming March elections and the current showdown between politicians regarding parallel market activities will see an increase in newspaper circulation and the company’s revenues. No news sells like news of political dogfights.

Besides previously starting slow, indications are that the ZECO IPO may be oversubscribed when the offer closes on the 25th of January. There has been a significant interest in the IPO from subscribers in the diaspora, increasingly seeking investment opportunities in Zimbabwe. Our previous valuation of ZECO using the Net Asset Value (NAV) formula yielded a value of Z$46,421.80 per share, representing an 83 percent premium and upside potential on the offer price. Factoring a 10 percent market driven appreciation of the price by 22 February based on historical market irrationality, our conservative and probably ‘irrational’ estimates yields a fair price of approximately Z$55 000 per share. The offer price is therefore a possible bargain.

By the time the company lists on the stock exchange on the 22nd of February, the offer price will most likely be way below market value and can easily correct significantly in the first week of trading followed by a possible stagnation thereafter. On a practical level, ZECO will face the usual challenges in the manufacturing sector such as a hyperinflationary environment, price controls and foreign currency constraints. As a business, ZECO relies heavily on the performance of other economic sectors such as mining, agriculture and the transport sector. Whilst the long-term outlook for the manufacturing sector may be brighter, the short-term prospects do not look so good. So given this scenario is the ZECO IPO a good buy?

To subscribe for shares in the ZECO IPO, contact the Coronation Team before the 23rd of January 2008. The IPO closes on the 25th of January 2008.

At an offer price of Z$24,927 a share, the IPO price is underpriced and considerably below the expected trading price on the first day of listing. The reasons for the underpricing may be varied. It may well be possible that on a basic level, the costs of going public are much lower than the benefits especially within hyperinflation making an IPO so attractive that a firm is willing to accept higher than usual underpricing to take advantage of the good IPO climate. Without the financial jargon, our optimism on the adjustment of the share price on listing is based on a concept known as ‘hot issue market phenomenon’ in which underpricing may result in periods of higher initial returns provided the market is in a bullish state. We still rate this as a buy.

Exchange Rates

Exchange rates on the parallel market remained stagnant during the week under review, with traders in London quoting rates between Z$7,500,000.00 to Z$8,000,000.00 to the Pound Sterling down from previous week’s high of Z$9,000,000.00. Roadport rates were much lower with the USD fetching close to Z$3,000,000.00 reflecting a huge trading difference between cash transactions and transfers. Rates are expected to remain steady in the next couple of weeks due to cautious trades ahead of the elections.

Rate movements will also be affected by the political row currently brewing between politicians and the central bank governor who is set to ‘name and shame’ senior government official allegedly involved in illegal parallel market transactions before the Parliamentary Portfolio Committee on Budget and Finance on Monday. This comes within increased pressure from other sectors such as the Economic Crimes court and controversial MP, Leo Mugabe calling for the highly influential governor to be investigated on allegations of the central bank’s trading in the parallel market. There is every indication that a political showdown is looming between the warring parties with possible arrest of a number of officials as parties engage in a mud-slinging match. These wrestling matches, much to do with politics than the economy will result in careful trades from big traders in the next couple of months

For exchange rate updates exchange rate analysis contact Crown Exchange by text on 07960162142 or email crownexchange@btinternet.com Service available in UK, USA and SA.

Regardless, exchange rates will most likely be supported at current level due to continued requirements for food imports and payments needed for critical supplies such as electricity and fuel. Rates will therefore swing between demand and supply and political deference.

Personal Finance

Why you should consider drafting your Will?

It is important for anyone who has accumulated some bit of assets to consider drawing up a Will to specify the inheritance of their assets. Studies have shown that fewer African people take time to draw up their Wills mainly due to cultural apprehensions regarding death. As difficult as it is for many of us to accept the inevitable, we all have to go sometime. People are also living so long that they put off drafting their Wills until it’s too late. Besides the obvious need to protect your assets, biblical wisdom also suggest that ‘a wise men leaves an inheritance for his children and for your children’s children’.

Arranging to pass on your wealth to the next generation is the cornerstone of sustainable generational wealth creation. The highly nomadic habits of many Zimbabweans have started to complicate how people structure and manage their assets. This is particularly problematic when you have assets in different countries. With more than 3 million Zimbabweans estimated to be in the Diaspora, very few would have made a plan regarding how their assets should be distributed in the unfortunate even of their passing on, especially if this were to happen in a foreign territory.

Whatever your adult age, it's wise to have a will. I strongly recommend that you consult a lawyer as soon as you can and write a will, or update the one you have if it's more than three years old. You can also prepare a DIY Will using self-help kits available in many bookshops. However, since you will probably accumulate during your lifetime more wealth than you had ever expected to leave to your heirs, it is advisable to seek professional advice on how to draw up a Will that will stand scrutiny in a court of law because if you make just one slip, your Will may be worthless. If you are in the UK, we recommend that you contact Gaskins Solicitors, highly successful firm of solicitors based in Milton Keynes led by Jamie Garande, a Zimbabwean trained lawyer. The firm has an understanding of personal finance. The contact details for the firm are available on their website www.gaskinssolicitors.co.uk. We recommend that you consider protecting your assets as seriously as you consider making them.

Lance Mambondiani is an Investment Executive at Coronation Financial Plc, an International Financial Advisory company registered in the UK trading in Southern Africa and the United Kingdom. He can be contacted at coronation.uk@btinternet.com. Please contact us should you wish to subscribe to our mailing list. You can also contact the Coronation team on; Business lines +44 161 346 9559 or mobile +44 790 3293 227.
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The foregoing has been prepared solely for information purposes only based on independent research by Coronation, no representation or warranty; express or implied is made to its accuracy or completeness. Coronation therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. To discuss any of these investment options in detail please contact Coronation Advisory © 2007 Reg No. 06342947

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